Is the Mortgage Market Tightening?

With all the news about the meltdown of sub-prime lenders it is interesting to contemplate where the industry is going. What effect will this have on all classes of borrowers?

Let's remember that there is a bell-shaped curve of borrowers out there. Some are A-paper borrowers and they will be unaffected by the turmoil. 

Those who don't have much of a down payment will find fewer lenders offering 100% financing.  If you have a good job and are concentrating on paying off debt, it probably makes sense to put something into the savings account instead. Many people can easily handle the debt they have and think that lenders want them debt free. Not so.  They just want your qualifying ratios to be within guidelines. So long as your ratios are less than, say, the mid-40% range, having a down payment will be more important than a lower debt load. Your goal should be to accumulate a 5% down payment.

For those who are credit challenged, it will be more important to have FICO scores that are higher than was acceptable before.  Where a 580 FICO score might have been OK before, a lender might now want 620.  Where 680 might have been OK on a no-income-verification loan, a lender might want to see 720 now. It's always been a good idea wo clean up credit. Now it's going to be mandatory.

Across the board anything that looks as if it adds to risk is going to be shunned or there will be more pricing hits that would apply. Either way, for the borrower who is out there on the margin, it's going to be a little tougher.  You won't find lenders beating at your door.

These are just indications that the mortgage industry is going to be sliding back to doing business the old-fashioned way, you remember, when you were expected to have good credit, a good job with documentable income, and a down payment in the bank.